Take Care Of Your Cash

Jun 29, 2010

In these tough economic times, in fact in all economic times, small businesses need to take care of their cash.How do you know that your cash is taken care of?Do you have internal controls in place to safeguard your cash?

Internal controls are the foundation of all sound businesses practices.What are some of the internal controls that help safeguard cash?We can characterize cash controls into the following categories: signature authority, purchasing authority, expense controls, and working capital controls (inventory controls, receivables controls, and payables controls).

Signature Authority

Who has check signing authority in your company?Is it limited to the owners, principals, or officers of the company?Is a counter signature required?Is access to check stock restricted?Is there a segregation of duties between persons responsible for running, or writing, checks and persons authorized to sign?

Purchasing Authority

Do you require a purchase order for all purchases?Not just materials and supplies, but purchase orders for services and outside labor as well?If you use purchasing cards, do you establish spending limits, as well as sic code restrictions, depending on the cardholder’s position and responsibilities?To whom have you given purchasing authority and up to what limits?I was once affiliated with a manufacturer who had given their tooling engineers carte blanche authority to order tools, without a purchase order, via verbal authorizations.Needless to say, the tooling expenditures were always over budget, both in usage as well as cost.(By the way – this policy was changed within 30 days of my arrival).

Expense Controls

Do you have a budget for operating and administrative expenses?Do you track and compare actual expenses to budget?Does this budget flex the variable expenses (those that are directly, or indirectly, tied to sales volume) to your actual sales volume levels?In other words, if sales volumes are off 20% do you have mechanisms in place to reduce variable expenses in proportion to the lower sales volume?Do you monitor actual expenses to budget throughout the month or not until the books are closed?Are your expenses budgeted by department or by key management person?Are these people held accountable for the actual versus budget results?

Working Capital Controls

Who’s watching the inventory days on hand?Do you have a process in place to identify, or better yet prevent, the obsolescence of inventories?The more inventories you carry the less cash you have available for other uses.What about your receivables?Who’s watching the aging?What are your days sales outstanding?Are your customers paying to terms?Are you holding them accountable to your terms?How about accounts payable?Are you paying early without a discount (because it’s more convenient for your A/P clerk to “cut checks this way because it’s the way she’s always done it”)?Are you matching payables terms on raw materials to the receivables terms you get from your major customers who buy the products those materials go into?For example, if you have a major customer who pays you in 60 days, are you paying your material vendor in 30 days?Who can afford to carry their largest customer for 30 days or more?

Regardless of the state of the economy, or the state of your particular industry, there is no excuse for not taking care of your cash.Cash is king in ALL economic cycles.In a booming economy a healthy cash balance allows your company to make strategic acquisitions or investments when the opportunities arise.In tougher times, a healthy cash balance provides more options when looking at financing alternatives.It also might allow you to get through the tough times without having to rely on debt financing.The foundation of a cash rich company is laid down by sound, strong internal controls such as the ones discussed above.So, what are you waiting for?Take care of your cash!